China in Venezuela: loans for oil

Despite its frequent anti-american rhetoric (which should not stop with Maduro’s election), Venezuela remains largely financially dependant of the US. It does not brag about this and has been seeking throughout the Chavez years to escape the US sphere of influence. It is quite naturally that the socialist state, since Chavez’s election in 1998, has been turning more and more towards China. Indeed, Chavez visited China 6 times in his 14 year rule in attempts to integrate its alternative world system. The energy-hungry dragon on the other hand has very clear objectives in Venezuela: securing through investment and loans a fair share of the world’s largest recoverable oil reserves.

al jazeera

Chavez on the Great Wall

In the past decade but especially in the past 3 years, bilateral trade has soared more than exponentially from $500 million in 1999 to $7,5 billion in 2009 and over $20 billion in 2012 (PDVSA). China is now Venezuela’s second trading partner after the US  (Venezuelan trade ministry). In 2012, 65% of oil exports went to Venezuela’s traditional oil partner, the US, through its american subsidiary Citgo ; China was in second place with 20%. These numbers clearly show China’s new interest in the world’s 10th largest oil exporter (2012). More importantly, according to the US Geological Survey and the OPEC, Venezuela holds the world’s largest oil deposits in its Orinoco Oil Belt (although mostly heavy crude which needs important refining) and contracts are up for grabs. The oil industry, which accounts for 95% of the country’s exports, is controlled by PDVSA (Petroles de Venezuela), a state owned company created in 1976. The process of nationalisation of oil resources continued in 2007, when Chavez nationalised the Orinoco Belt projects, giving the state a minimum 60% ownership in all joint ventures. In these difficult conditions for foreign investors, China has two great advantages compared to its Western counterparts which are independence from the US and money.

Indeed, China is Venezuela’s biggest creditor. Venezuela’s difficult economic situation (growth of 6%, high inflation at 20%, budget deficit at 20%, growing public debt at 50% of GDP in 2012) means that it cannot easily borrow from global capital markets to pay for Chavez’ expensive social programs. Beijing and Caracas established a Joint Investment Fund in 2007 with an initial investment of $4 billion by China and $2 billion by Venezuela later boosted to a total of $12 billion in 2009. This fund is mainly used for investment in infrastructure, energy and agricultural projects. A study of Latin America funding by China in 2012 by Trufts University confirms another advantage of Chinese lending over the West as seen in Algeria: banks do not impose any policy condition on borrowing governments and generally have low environmental guidelines. These “tied loans” do however require equipment purchase and oil sales. For example the China Development Bank lent $500 million to PDVSA to buy machinery and equipment for oil drilling with contracts mostly awarded to Chinese-owned companies. Thereby, China serves as an alternative to international banks for financing with low rate loans, while securing access to Venezuela’s oil at a fixed low price and creating business opportunities. Beijing has lent $46,5 billion since 2008, which represents over half of the loans the country has received (95% are loans-for-oil).  Thus Venezuela is becoming oil-debt dependent which is naturally a great advantage for Chinese state-owned companies in trade deal and contract negotiations.

PDVSA

Venezuela oil fields – Orinoco oil belt

In the Chavez era, China has invested heavily in raw material. First and foremost in oil: China imports about 10% of its global oil imports from Venezuela – 600 000 barrels per day in 2013 aiming to reach 1 000 000/day in 2015. Of these, 270 000 barrels/day are to repay debts, for a price sometimes as low as $5/barrel according to wikileaks. Chinese state-owned companies have also been awarded many prospecting, drilling and refining contracts offshore and especially in the vast Orinoco belt. Sinopec and CNPC both have established joint ventures to exploit reserves and build refineries in the Junin area while CITIC (China Internatioal Trust and Investment Corporation) and Sinohydro agreed to build condominiums in the Junin and Carabobo areas. China has also invested heavily in Venezuelan mining.  Aside from contracts to build industrial condominiums and 33 000 homes in the belt, CITIC has also been awarded a joint ventures in 2012 to explore the Las Cristinas gold and copper mine in Bolivar state, which is one the world’s most important gold reserves. Chavez nationalised the gold industry in 2011, in effect expropriating Canadian “Crystallex” from the mine, who is still at the moment seeking compensation with the help of the World Bank. This is a good example of the shift from Western to Chinese investors and especially to CITIC which is one of Venezuela’s Chinese creditors. Furthermore, like with PDVSA, Venezuela’s stade-owned mining company CVG (Corporacion Venezolana de Guayana) agreed in 2010 with WISCO (Wuhan Iron and Steel Corp – China’s 3rd steel company) on fixing long-term iron ore under the market prices compared to other South American competitors (such as Brazil’s Vale). This shows China’s ability to negotiate cheaper raw material and secure new important contracts after years of domination by the US and other Western powers.

China’s investments are not limited to natural resources and are diversified. Many projects are under way enabling technological transfer to Venezuela.  A joint venture railway company was launched in 2009 controlled at 40% by CREC (China Railways Engineering Corp). More importantly, China has built and launched Venezuela’s two satellites. The first, a geostationary telecommunication satellite called Simon Bolivar, was launched in 2008 from Sichuan in China. The controls were handed over to the Venezuelan government in 2009 after the training of Venezuelan engineers. The second, a monitoring satellite called Miranda, was recently launched in 2012 from Gansu also in China and was widely greeted in Latin America as a great technological leap. China has also launched many joint ventures in electronics with factories built in Venezuela allowing a full transfer of Chinese know-how. In 2009, Venezuela’s first cellphone company, VTELCA (Venezolana de Telecomunicaciones), was set up as a joint venture between the government and Chinese state-controlled telecommunications company ZTE. The factory produces the “Vergatario” for Venezuelan and Caribbean markets which, highly subsidised by the Venezuelan government, is sold about $7 and may well be the world’s cheapest cellphone.  Most workers (housewives and labourers) come from surrounding villages and are trained and supervised by the Chinese while ZTE supplies parts and know-how. A last sector where China is operation a technological transfer is in the Agricultural sector with the establishment in 2011 of a joint venture in between PDVSA (70%) and Heilongjiang Beidahuang Nongken Group (30% – China’s largest agricultural company). Indeed, China which has a poor amount of arable land, is expanding its agricultural companies abroad to diversify its imports. In Venezuela, the company provides machinery and labourers as well as a greater variety of seeds in return of approximately 20% of the harvest. Again, China’s main priority is to secure resources and conduct business but Venezuela is thereby achieving a great technological leap.

Indeed, China is investing in Venezuela for energy security but also for business and profit. Beyond the numerous bilateral benefits, it has two main negative aspects on China and its international relations with the US, but also on Venezuela and its economy. For example, due to the transport distance (it takes about 40 days to ship oil to China) and refining problems, Chinese state-owned companies sell up to a third of Venezuelan oil locally for profit (there is a noticeable gap in between PDVSA export and Chinese import figures). China however wishes to conduct business in South America without raising tensions with the US, either by enforcing Venezuela’s anti-american rhetoric or by challenging their presence in their “back yard”. Thus, although mainly conducted by state-owned companies, China has to put great effort into separating its business from its politics contrarily to Venezuela. As for Caracas, one of the consequences of raised dependence on oil exports is the decrease of other business due to the “Dutch Disease”. This effect takes place when important natural resources export increase the value of a country’s currency, thus making other exports more expensive and less competitive. A good example in Venezuela is in the textile industry, where it is becoming cheaper to import Chinese textile than to produce it locally (which once again indirectly benefits China).

Beyond these difficulties, prospects are good for China-Venezuela relations, even after Chavez’s death. Since his election, Maduro has already promised that his first trip abroad would be to China. He even said “the best tribute that we could give to our Comandante Chavez is to deepen our strategic relationship with our beloved China”. China seems evermore poised to secure new deals in Venezuela’s oil-economy and eventually buy stakes in debt-ridden PDVSA if it is denationalised. Talks have also started in 2012 to establish a free trade agreement with Mercosur. The dragon’s strategy of tied loans and loans-for-oil means it is at the same time securing resources and creating business through its investment. Although not risk-free, it is clear that Venezuela will need Chinese funds in the future and should respect the deals even in the case of a collpase of Maduro’s government. It is also establishing itself as the second power in the Caribbean region and in Latin America. China will have to be careful not to push the continent into a bipolar balance of power and not confront the US but rather build partnerships with it, so as not to hinder its “peaceful rise” global strategy.

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